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Learning Objectives

Power Notes. Chapter M10. Cost Allocation and Activity-Based Costing . 1. Product Costing Allocation Methods 2. Single Plantwide Factory Overhead Rate Method 3. Multiple Production Department Factory Overhead Rate Method 4. Activity-Based Costing Method

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Learning Objectives

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  1. Power Notes Chapter M10 Cost Allocation and Activity-Based Costing 1. Product Costing Allocation Methods 2. Single Plantwide Factory Overhead Rate Method 3. Multiple Production Department Factory Overhead Rate Method 4. Activity-Based Costing Method 5. Activity-Based Costing for Selling and Administrative Expenses 6. Activity-Based Costing in Service Businesses Learning Objectives C10

  2. Product Costing Allocation Methods Plantwide Overhead Rate P R O D U C T S Single Rate Multiple Department Rates Department Department Activity-Based Costing Activity Activity

  3. Single Plantwide Factory Overhead Rate Total budgeted factory overhead costs Total budgeted plantwide allocation base $1,600,000 20,000 direct labor hours = $80 per hour Snowmobile: $80 x 10 direct labor hours = $800 Lawnmower: $80 x 10 direct labor hours = $800 What are the advantages of the single plantwide overhead rate method?

  4. Multiple Department Factory Overhead Rate Fabrication Department Overhead Rate: $1,030,000 10,000 direct labor hours = $103 per hour Assembly Department Overhead Rate: $570,000 10,000 direct labor hours = $57 per hour Snowmobile: Fabrication: $103 x 8 dlh $824 Assembly: $57 x 2 dlh 114 $938 Lawnmower: Fabrication: $103 x 2 dlh $206 Assembly: $57 x 8 dlh 456 $662

  5. Conditions for Product Cost Distortion Fabrication Department Assembly Department Condition 1: Different department overhead rates $103 per direct labor hour $57 per direct labor hour Snowmobile 8 direct 2 direct labor hours labor hours Condition 2: Different ratios of allocation-base usage Lawnmower 2 direct 8 direct labor hours labor hours

  6. Activity-Based Costing Activity Amount Activity Rate Fabrication $ 530,000 / 10,000 dlh = $53 Assembly 70,000 / 10,000 dlh = $7 Setup 480,000 / 120 setups = $4,000 Quality control 312,000 / 104 insps. = $3,000 Engineering 208,000 / 16 changes = $13,000 Total $1,600,000 Fabrication: DL Hours Rate Total Snowmobile 8,000 $53 $424,000 Lawnmower 2,000 53 106,000 Total 10,000 $530,000

  7. Activity-Based Costing Activity Amount Activity Rate Fabrication $ 530,000 / 10,000 dlh = $53 Assembly 70,000 / 10,000 dlh = $7 Setup 480,000 / 120 setups = $4,000 Quality control 312,000 / 104 insps. = $3,000 Engineering 208,000 / 16 changes = $13,000 Total $1,600,000 Assembly: DL Hours Rate Total Snowmobile 2,000 $7 $14,000 Lawnmower 8,000 7 56,000 Total 10,000 $70,000

  8. Activity-Based Costing Activity Amount Activity Rate Fabrication $ 530,000 / 10,000 dlh = $53 Assembly 70,000 / 10,000 dlh = $7 Setup 480,000 / 120 setups = $4,000 Quality control 312,000 / 104 insps. = $3,000 Engineering 208,000 / 16 changes = $13,000 Total $1,600,000 Setup: Setups Rate Total Snowmobile 100 $4,000 $400,000 Lawnmower 20 4,000 80,000 Total 120 $480,000

  9. Activity-Based Costing Activity Amount Activity Rate Fabrication $ 530,000 / 10,000 dlh = $53 Assembly 70,000 / 10,000 dlh = $7 Setup 480,000 / 120 setups = $4,000 Quality control 312,000 / 104 insps. = $3,000 Engineering 208,000 / 16 changes = $13,000 Total $1,600,000 Quality Control: Insps. Rate Total Snowmobile 100 $3,000 $300,000 Lawnmower 4 3,000 12,000 Total 104 $312,000

  10. Activity-Based Costing Activity Amount Activity Rate Fabrication $ 530,000 / 10,000 dlh = $53 Assembly 70,000 / 10,000 dlh = $7 Setup 480,000 / 120 setups = $4,000 Quality control 312,000 / 104 insps. = $3,000 Engineering 208,000 / 16 changes = $13,000 Total $1,600,000 Engineering: Changes Rate Total Snowmobile 12 $13,000 $156,000 Lawnmower 4 13,000 52,000 Total 16 $208,000

  11. Activity-Based Costing Cost Allocation Summary: Activity Snowmobile Mower Total Fabrication $ 424,000 $106,000 $ 530,000 Assembly 14,000 56,000 70,000 Setup 400,000 80,000 480,000 Quality control 300,000 12,000 312,000 Engineering 156,000 52,000 208,000 Total $1,294,000 $306,000 $1,600,000 Budgeted units 1,000 1,000 Cost per unit $1,294 $306

  12. Activity-Based Costing in Service Businesses Hopewell Hospital—Activity-Based Costing $180 per admission P A T I E N T S Admitting Radiological Testing $320 per image Operating Room $200 per hour Pathological Testing $120 per specimen Dietary and Laundry $150 per day

  13. Activity Costs Allocated to a Patient Patient Name: Mary Wilson Activity-Base Activity Activity Activity Usage Rate Cost Admitting 1 admission $180 $ 180 Radiology testing 2 images 320 640 Operating room 4 hours 200 800 Pathological testing 1 specimen 120 120 Dietary and laundry 7 days 150 1,050 Total $2,790 The overhead cost associated with services can be related to the customers that use the service.

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